What US Taxpayers With Crypto NEED to do before Dec 31, 2024 - Get into the Safeharbor!

hello and uh welcome everyone um I'm Andreas M antonoplos the Bitcoin and open blockchain expert and I have with me today Kirk David Phillips CPA and CVP and we're talking about the IRS Safe Haven rules uh these rules that take effect uh January 1st and require action before the end of the year it's a very important topic that I found out about by reading the Crypt Bullseye newsletter and blog that Kirk uh has been publishing for quite a while now you can find more information at Crypt Bullseye dozone Kirk welcome and uh thank you so much for helping us understand this complex issue thank you so much for having me here yes this is a very very important topic that many people need to get out get to become aware of as soon as possible here because of the short deadline to take action right so we have two weeks uh as we're recording this is December 15th um and we have two weeks where people actually need to do some things to be prepared for this and so we're going to talk about what the IRS Safe Haven rules are um what implications they have and whatting exactly people need to do in the next two weeks to be prepared um for this new rule and also what the consequences are if people do nothing right what kind of problems might arise so why don't you kick it off and and tell us what the IRS safe heaven rules are and what people need to do in the next couple weeks sure absolutely so first of all let's just take a step back to a further point in time where all this stuff originated from so So within the last couple years there have been some bills that have been bouncing around US Congress that are called the digital asset broker rules and those actually became Final in 2024 somewhere around the middle of the year so those digital asset broker rules are basically requiring digital asset Brokers which we which are mainly centralized exchanges okay but that could be expanded more broadly than that but right now as it applies think centralized exchanges when we talk about digital asset Brokers one of the concerns with that defin with that definition originally was that it was too broad and it was basically a net that was being cast to even uh capture self- custody ws and things like that so anyway that's that's a deeper conversation but nonetheless right now we're talking mainly about centralized exchanges so we can think about anybody right now that has any traditional brokers whether that's a Fidelity or TD trade any of those type accounts which which where you could either have a broker that uh helps you with your uh activity or you know it's a self-guided account but nonetheless uh you know especially in the age of where you can have your own account and you're provided with all kinds of tools but if anybody that has any activity that has to do with traditional Securities that is aware that they get a 1099 B from US Treasury in the IRS so what is a 1099 B well a 1099 B is a statement that lists all of your trading activity so all of your sales whether it's stocks bonds or any other type of traditional assets like that it lists all the sales and in cases in most cases where the broker actually has your detail about your cost bases it reports that too so it's how much you sold it for and it's what you bought it for and the difference between those is going to be your gain and loss now the broker doesn't always have the cost basis information so it may just be the process part of the equation but many times they have both of those it will report gains and losses it may even uh summarize those for you for you and so where it it will have both short-term gains and long-term gains summarized and also in the 1099 B it would also include dividends interests and other types of income like that all right so that is what the in question there um sure just for my own edification um I don't really know about this much I I get a 1099 B um from my investment retirement account uh okay so I I do know that in crypto we choose uh a cost basis uh method uh such as fifl or perhaps something else like uh hiel um what do they use is it always fold that is an excellent question that's an excellent question we're actually going to get into that okay great we're going to get deeper into that but yes so right now when we talk about trafi you've got two things that you can use which is fifo first in first out and specific identification so we'll talk about that later now in this scenario uh the Brokers would actually default to fifo unless you instruct the broker specifically instruct them that you want to follow specific identification and if you were to do that then they would not take any action on a trade until you tell them the specific lot yes it's this lot meaning uh whatever ABC security that I rep purchased at this time for this cost basis that's the specific one I want to tell sell I mean so if you don't tell them what it is they're not going to take any action because you've already left them with a standing order that says I want to follow a specific identification so we're g to that's great because we can tie into that later so anyone who gets a 1099 B statement uh that that's a great seg way to tie in that the intention of the digital asset broker reporting rules is to basically wrap all of that around crypto so that the same exercise happens in crypto and you get a 1099 B that shows up with your crypto asset activity on it however instead of 1099 B they've created a special name it's called 1099 da for digital assets but the essentially the outcome is the same so that all this stuff is reported now why why do that why go through that exercise if you were to assume that everyone was to self-report um because there's many things uh related to tax for you self-report not everything is reported on a third party statement well the number one reason for it is there's a thing that's called the tax Gap what is the tax Gap the tax Gap is the difference between what US Treasury thinks is the revenue that they should collect and what they actually collect and there's hundreds of billions of dollars that are estimated to be the tax gap which means Revenue that's left on the table that they don't collect and that's for various different reasons and again there's a huge portion of Revenue that's self-reported so for example business income and expense you uh you know you manage all of the revenue in your business you manage all the expenses and you report that there's no record there's no third party that reports any of that so that's one example where you are voluntarily reporting everything that happen around that particular business and so on so and now some on the other hand some things like a W2 well in that particular case the employer fires files a W2 and then you as the taxpayer you file your tax return with that W2 information and that allows the IRS to match and they're looking for it to match up so that's why they like thirdparty reporting when you have third party if everything could be third party reported the the in theory the the theory would be that you close the T the tax gap down to zero or approaching zero okay right so the perception here is that there's a gigantic portion of the digital asset and crypto user population that is not reporting and they think that the the tax Gap is so large that we need to close this tax Gap so that we can collect the revenue that you know they think it's they say we're entitled to based on the laws so that's where all this originated from is to now wrap 1099 B reporting for traditional Securities around crypto but again it's called now 1099 DX okay all right now the there's a lot of things that are going to be in transition with this uh that we don't know yet but like I said this basically applies to centralized exchanges right now it does not apply to dexes or decentralized exchanges let's say the jury is at on that at this time but that's where we're at right now so what happened right so let let me ask a followup question so I I think at first glance people might think okay this doesn't really affect me I'm already reporting and paying my taxes on crypto so I'll just continue doing that um and by reading your blog newsletter I understood that that is in fact not the case that it very much does affect you um so uh correct I I can say comfortably that um I do report my crypto capital gains and have done so uh ever since the beginning um because I would rather enjoy those gains from outside a prison cell and you know the IRS has a tendency to take that route in fact I was reading an article just yesterday of someone uh who ended up really really pushing the boundaries and trying to not pay a dime while buying houses in the US and things like that and they're currently serving a two-year prison sentence in Texas um um so so I am reporting my um capital gains and let's say I use a traditional centralized exchange and I but but I do my own custody I don't I don't keep my uh crypto or my Bitcoin more specifically um on that exchange so normally as I recommend people do you send the amount of money you want to exchange you exchange it it you sell it on the exchange and then you take the US Dollars uh or Euro whatever out uh you don't leave things on the exchange and that's how you should behave for self- custody now at the end of the year this exchange is now going to have to do a 1099- DA uh on my digital asset sales and they have no information on my cost basis in the past I simply ignored their 1099 and I produced my own reporting for which is a 89 what is it 4 8949 an 8949 right where I report um for each one of those things that cost basis and I use a piece of software to do that what I understood is that is no longer going to be enough or it's not going it's not as straightforward as that so let's go into that a bit um so even for people who do not um keep their on an exchange who do self- custody um and who do report their crypto gains um and pay taxes on them this has some rather significant implications can you what are those implications and why is it we need to take action correct so to just fast forward and tie this whole thing together so as a result of these digital asset broker 6045 regulations becoming final in the middle of the year as a result of that what happened is as a surprise and out of the blue came the subject of today's talk which is IRS rev proc Revenue procedure 202 24-28 which is simply transitional guidance so they said that you have to do this is how this is going to happen go forward and as a result of that you got to make this onetime transition to facilitate as a teup to what's going to happen going forward so the key takeaway here is and this does affect everyone it doesn't matter whether where the assets are self- custody centralized exchanges doesn't matter how you use it what assets you have this applies to everyone to have to go through this exercise now may be a lot more work than others but the number one takeaway here is that what has been taken away which as you explained using the software in the past so the way that all software uh was designed is to account for your account for your crypto under the universal basis so Universal method has now been eliminated so now you are going from a universal method to a wallet by wallet or account by account methodology now univers let me see if I let me see if I understand this correctly what the universal method is and I can I can use my experience to describe how I experienced this so in the past what I what I would do is I would um go to one of these software platforms um usually web-based platforms and I would link them to one or more exchanges that I have trading activity on and they would suck all of the transactions and put them in at the same time they would have previous transactions from years earlier when I originally bought uh those or I've manually entered the price at which I bought some of those things and then they and this is the key the universal basis they throw all of the transactions from all of the wallets and all of the exchanges is into one big bucket right and then when I tell them use this method for calculating gains first in first out or uh highest price first out or uh lethal or whatever other method you can pick from the dropdown they do that across the entire bucket of transactions regardless of whether uh I bought on coinbase and sold on Kraken I bought from a private individual and sold on uh you know coinbase or whatever so I could basically say the thing I'm selling on Kraken gets matched to the thing I bought on coinbase or the thing I had in my wallet from another source uh even though I also have things I bought on Kraken and left on Kraken and now I'm selling I could say no no it's not that one I'm selling it's the other one that that has a more advantageous cost basis for me and I could just basically pick and choose from the bucket or rather the software could and you're saying that is the thing that's no longer allowed that is correct and that was an excellent analysis okay know that's exactly what it is so what I like to say is that Universal method is as if so if Bob has 37 wallets and centralized Exchange accounts it was as if all 37 were dumped into the same bucket exactly as you described it's as if you had one coinbase account or you only had one Kraken account it's dumped together for one universal accounting as if so all the for transactional purposes it's as if you had one wallet so that's it yes that's correct that's what's been eliminated so what happened so now hang hang on a second and this is the idea of a a one bucket that exists virtually that virtually consolidates all of the different wallets into one entity what if you actually have one bucket what if and just to understand this doesn't mean that you can't have a wallet a single wallet that that is the place you took all of your crypto so if you have let's say a hardware wallet and you bought a bit on Kraken and you bought a bit on binance and you bought a bit on coinbase and you withdrew that money and you put it in your your own self- custody you literally put it in the same wallet and then later you took it out of that wallet and you sent it to an exchange I don't know if I'm sending the same utxo that I withdrew from the other one it went into the bucket at that point have they also eliminated that being considered as a universal that that actual single bucket well that is yeah if you actually have right now one Hardware wallet for example and like I said you your examples like you purchased it from three different exchanges whatever and some other source and I didn't leave it there I took it I withdrew it to my own personal custody and mixed it with all of the other coins I have did mix it I just deposited it in my own wallet yeah so in that example that's actually the other end of the spectrum than the scenario I was making up with where Bob has 37 while it's an exchange account now you have one yeah so in that case yes it's Universal but it just so happens that it's a unique situation where it matches one to one where the hypothetical or the virtual transactional accounting of it happens to magical the the physicality of it if you will where the coin so that's still okay well that that's yes that's okay now that doesn't mean you don't go through the exercise that we're going to talk about very good what you've done is you've eliminated some of the work that you would need to do to make this exercise more palatable and to set you up for better success in this allocation exercise you happen to have to set yourself up by accident through I'm glad to find I'm glad to find another silver lining for self- custody um because because for for for many years it it's it it's been all burden right so say have being able to say that actually in this in this particular scenario self custody makes the accounting a bit easier well let let's but it still doesn't eliminate the need okay so let let me let's go back to what you were saying so you're Bob and you have 37 Exchange wallets um actually distinct that you don't withdraw back to a single source and in the past when accounting for capital gains you use software that that that made it appear as if they were all one universal virtual wallet the money could come in and out and that's no longer allowed so what happens now if you're in that scenario right so what happens now first of all is what I like to say is the iris just tripled your tax prep cost and created an absolute nightmare but that's that's that's really what happened so the issue is it was already challenging enough to go through this exercise anybody that's in crypto can tell you that the best person to manage it is you and it can be extremely challenging even to do it and to come up with the let's say the best result an accurate result it can be extremely challenging especially if you're on the DJ end of the spectrum here so now you're you're the best one to do it so now you've been relegated instead of s well so basically Universal accounting is a single accounting okay now Bob has 37 different sets of accounting that's what he's been relegated to so in practice you're doing a separate 8984 matching of purchases and sales for 37 different wallets it could be that yes you you're almost back to spec what we call it specific um specific allocation well specific identification but me in that case even regardless of whatever method you use lifo fifo Hyo spec ID you still Universal still applied so Universal is not a cost basis method by the way because all these things can be confusing Universal is not a cost basis method like a Hyo or a fifo it's the context that you can apply it's the context in which you can apply fifo correct which transactions can I consider for the fiveo matching let's say I'm picking fiveo as my cost basis first into what first out of what and with universal basis it's first out first in generally across all of my digital assets now you're going to let's say you've decided you're doing fold you're going to have to do fifo for one of 37 buckets and you can only match fiveo within that context and then you're going to have to do it again and separately for matching in other context and therefore the list of candidates you can use for you're basically let's say you're now doing the first out the candidate that you can match as the corresponding first in transaction for that first out has to be from the same bucket and can no longer be from anywhere is that am I understanding that correctly 100% correct well explained and then yeah so you've narrowed the field of candidates down to use it and let me guess none of the software does this correct and this is where it gets really complicated because corre if you do a lot of trading previously the only way you do this is the soft would figure it out for you but now you can't do that because the software automatically throws it all into a universal bucket that's correct we're going to get into that deeper later oh boy software issue okay yeah so that yes so I think we we've summarized it well the key takeaways here a universal approach has been eliminated now we're down to a wallet by Wallet account by account method so I think most people would get right away that oh wow this you the complexity just skyrocketed by like 10x choose your multiple yeah how much the Skyrocket the complexity skyrocketed so hence that's where a lot of the conundrums come in is because you have this one first of all you got a onetime allocation now that you need to do that's one thing going through that exercise after that you then have the going forward challenge how are you going to manage this going forward in the 2025 and Beyond okay great so let's talk a bit about this uh one-time allocation that you have to do now so you're Bob you have 37 centralized Exchange accounts and and you're in the worst possible scenario um what do you have to do what is the safe haven transition rule so they they made this rule to give us some guidance on how to transition into an environment in which the universal basis is no longer um available able to us what is this transition rule or transition procedure basically the transition rule gives you two paths to make a transition so one of those is called the global allocation method and the other path is called the specific allocation method and let's be clear here that specific allocation is not specific identification and again this is one of those things where the where the the terminology is similar and it can be easily collapsed and you think it's one thing and it's not okay again specific specific okay so let's let's deconflict this so specific identification which I Mis uh spoke earlier specific identification is when you're applying the cost basis you're essentially removing the fungibility you're identifying a single unit of uh stock Bond or crypto and saying this unit is the one I just sold and that's specific identification correct cherry picking specifically cherry picking the one that you want right and that is to the exclusion of a more generic approach for cost basis which would be something like fifo where you're doing it based on the date uh or uh hpo where you're doing it based on the price where specific You're simply removing the fungibility completely and you're identifying each and every unit and and and matching them manually okay so so specific allocation and Global allocation are the two paths for the interim adjustments all right so what are those two options we have right so with global allocation Global allocation is like a formula or a recipe is what I like to call it so you would simply say okay I'm going to write this out literally like a memo a game plan type of a thing a recipe which says and I want to apply the oldest coins I want to I want to apply the cost basis for the oldest coins the oldest eth whatever that is eth from a crowd sale or oldest Bitcoin you got from way back from a long time ago and I want to allocate those first in this particular wallet Anda in in case it may actually be where you have uh a self- custody Hardware wallet uh with BTC that you got a long time ago it's actually never moved and it's very clear I have this call spaces with that wallet and that one kind of takes care of itself so you might say all right that's I want to do I want oldest coins and the cost Bas is related to that in this particular wallet over here maybe it happens to be the oldest wallet or you could say I want the coins with the highest cost bases to be allocated over here in this wallet so you create a formula now the key distinction about global allocation is that if you take it once you're done with that if you take this recipe and you give it to four different people Bob and Alice and Dimitri and Andreas everyone will come up with the exact same result if they follow the formula because it's formula based so theoretically four people have it four people follow the formula the end result should be exactly the same with specific allocation it's simply taxpayer's choice or like you think of it fielder's choice in baseball he gets the ball he gets to choose where he wants to throw the ball you get to choose how you want to allocate and the result different this is not a CO this is not a cost basis um allocation like fifo or hpo or specific um identification this recipe is for grouping um grouping assets into wallets am I understanding this correctly yeah the the idea at the end of the day here the takeaway at the end of the day is back to Bob and his 37 W say when Bob is done with his exercise he has call spaces specifically assigned to each of the wallets whatever the assets are in the wallets he is now assigned locked in call spaces for those wallets what what does call spaces mean call spaces cost spaces sorry costes yes cost basis he's locked in cost basis uh and and that can that cost basis transcend so let's say you have 37 wallets and you decide you're going to do a cost basis uh based on the the uh oldest coin right okay does that mean that you pick um a cost basis for your coinbase um your coinbase wallet um you pick another cost basis for your Kraken wallet or you have to pick one cost basis and then apply it to all of the 37 wallets you have um so as to harmonize them I'm not I'm not quite sure I understand yeah it's a little well it's a little like in global there could be a little bit there could be I believe some mixing and matching you could do but yeah essentially you're uh you are simply just again it's assigning it by formula where anybody could anybody could calculate the same result because you're describing how you want to do it rather than actually doing it so the specific allocation is simply it's like moving chest pieces around and I just want put over sign this over here and that over there and so on so it's more granular it's more work specific allocation I guess another way to look at it too is with global allocation it's more of a way to do it so that it's I could say maybe it's not as much work to May simplify rather than specic when you do specifically it might be more work because you're doing it on a more granular basis understood so basically what the IRS is is telling us is um because we're going to start doing this a new way where you won't have the universal basis you have to commit in advance if you want you're either going to end up with a scenario in which you have to do it 37 different contexts manually after January 1st 2025 so next year if you do a sale you're either going to have to say say this got sold on Kraken therefore I have to find an equivalent cost basis within Kraken or this got sold on coinbase or any of my 37 Bob wallets I have to do it the really hard way which is the only context that's allowed is that narrow context or in the interim I can promit allocate cost basis now during this Safe Haven which is now only two weeks clearly allocate the cost basis now commit to that and from that moment on I can then follow that pre-committed to cost basis going forward to simplify things and the two ways I can commit are either with a specific allocation where I pick the cost basis for every single um commitment I want manually or using a a recipe which is basically an algorithm um that if applied to the same lots of digital assets would always result in the same outcome regardless of who applied it so it's an algorithm uh a mathematical algorithm such as pick the oldest one or pick the highest cost or pick the the lowest cost or whatever and and I'm going to pre-commit to that and then I carry that forward into 2025 so I don't have to do 37 different um allocations that's that's correct yes that's that's exactly it right okay and so again and the where I was saying that using your the way you're describing as an algorithm so if you then in the specific allocation method it will be basically if you gave it to using my same example Dimitri Andreas Bob and Alice they're not going to come up with the same result specific allocation to do it specific allocation is a table right it's a table where you list all of the cost bases that's right yeah per unit and you're just creating a starting point yeah you're creating a fresh starting point that says this is what I declare is in the wallets for the way that I now need to account for the way that Now call spaces methods need to be applied going forward from here okay you're putting a stake in the sand to say this is what it is you're describing it you're laying it out and then that's your new starting point fresh starting point going into the future all right and um so if if you do nothing you walk into 2025 completely unprepared come 2025 you go on any one of these Central Iz exchanges and you do a sale they're going to issue a 1099 da um and they're going to match it to one of their previous things that you did on their exchange because they don't have any other way of of finding out and you're not going to be able to give it a broader context anymore because you don't have the universal basis um so one you're going to have a complete accounting mess at the end of 2025 because you didn't proactively simplify it and and two you're probably also going to not have an optimal calculation of your gains and losses which means you may end up paying a lot more in taxes that's correct you could set yourself up for first of all you have to do this anyway okay right so the question is what happens if you don't and yes you could create a mess because you didn't pre-plan that's one whole that's one issue by itself but the other issue is that you have to do it anyway so if you miss the deadline you missed the Safe Harbor and then the question is well what happens there or what does the Safe Harbor get me so well one of the things is we don't actually know what it means when you don't we don't know what it means to be in the safe harbor normally that's spelled out but again as I supplied as a link in the with the aicpa's comment letter to the the IRS on this you'll see that that actually kind of Paints the picture as to here's this rev proc but yet here's all the unknowns so here's the things where it's not clear here's all the gray areas that's painted out that's spelled out there okay so what it should mean is that if by going through the safe harbor exercise that you have have a force field that says that if I was challenged on any of my prior work or if I was audited on my prior work that it can't challenged that's like is like a force field around what you previously done and that sets you up it's like a protection an invisible protection so this is not just about your 2025 taxes this is going to create problems for how you um applied and uh reported the past 10 years of capital gains on crypto 2 the save protects you by wrapping that all up in a bow and saying this is what I did and here it is documented so you can't say anything about it that's that's correct that's what we believe it could be but again we don't know because our laid out well we know that if you don't do anything it only gets worse right so that's right I I think what I'm getting from you is an unequivocal right recommendation here uh and please correct me if it's not the unequivocal recommendation is do something while you're in the safe haven there is there is no scenario in which simply ignoring this problem will be better it will always be worse to ignore this and not do something you have a unique opportunity just in the next two weeks to do something and you will always be better off if you do this something than if you don't do anything is is that that's that's 100% spot on that's probably the maybe perhaps one of the that's going to be maybe the number one takeaway of the day is that because as I as I said again you still have to do the exercise you still you wait until later and you don't do it you miss the opportunity for let's say this protection this invisible force field but then you still have to do it anyway so you didn't get out of doing it and you missed all the benefits so and that brings us to the most important question which is the Crocs of the matter uh you have to do it what is it uh so let's let's assume that okay I've listened to everything you've said I now know I have two paths that I have to execute in the next two weeks a global allocation or a specific allocation in order to uh clearly identify how I'm going to be doing cost basis on on the way forward uh what do I do and how do I do it so let's start with what first of all let's not go to the 37 wallets let's assume that I have four right keep it a bit more realistic for the everyday person right I have a couple of things on an exchange maybe I've got some staking maybe I've got some coins left over there I have a couple of things on a custodial account I have um and I have a couple of cryptocurrencies or a handful of crypto currencies in a in a software or Hardware wallet um that that is self- custody uh what exactly do I need to do and let's assume that I've been paying taxes over the past uh however many years um and and in this scenario I've been using one of the software platforms to do it uh uh for example bitcoin. tax and or one of the others and I've been using a specific cost basis methodology yeah and let's for example purposes say it's not fifo which is the obvious one let's say it's highest price first uh but I've been using that consistently for the past five years I've been using it consistently every year what do I need to do in the next two weeks that is an excellent question so first of all there's three simple things that I think it boils down to to set yourself up to make this to to simplify the exercise and to have the best result when you're done with the exercise for the documentation because that's what you want to get you want to get doc you're looking to document right okay think a table and so on maybe some memos that go along with it so number one number one I would say is consolidate your assets so if you can this is the goal I'm not saying you get there because there could be several reasons why it doesn't make sense sense it's a cost benefit analysis yeah everything so that could be consolidate all of your assets into a one asset type into a single wallet so it doesn't have to be that it's one wallet it's just that you have all your BTC in one wallet all your eth in another wallet and so on so it's not so much and and one is better than two but two is better than five and five is still better than 37 right so any degree of consolidation is going to massively reduce your workload there's all kinds of reasons why you can't hit that it doesn't make sense to security purposes many many we you could have a whole episode just on that alone but yes that's exactly right so the goal is to consolidate as much as possible Right based on the amount of time you have and other factors because that's going to give you make the documentation exercise is going to make it much much easier so that means and and let me let me get it very clear here um consolidating into fuel wallets not changing asset types because if I understand correctly if if I would say okay I'm gonna make everything Bitcoin I'm gonna sell my e I'm gonna sell my Doge I'm gonna sell my uh whatever and I'm going to turn it all into Bitcoin well now I've just created a whole bunch of taxable events and that could have bad implications you're not suggesting that you're saying simply I have my Bitcoin my eth my Doge in five different wallets each and I want to have one wallet for Bitcoin or two one wallet for Doge or two one wallet for eth so I'm reducing the number of wallets not the variety of assets and I'm not converting or selling or exchanging assets to different types I am simply moving them same type to a different wallet so that they're in the same wallet is that correct I I think that's yes I think you're spot on there so again again another way to to spin it or to explain it is to say okay if you have if your assets are BTC eth soul and avac okay so if you have four if you boil it down the four wallets so BTC is in wallet a e is in wallet B aex is in wallet C and solos and wallet D you've achieved that's the goal because you have one asset and one one spot and you haven't created any taxable events you haven't bought or sold or exchanged or traded you've simply moved right that's right okay great so consolidate a step one consolidate great got it what's step two step two is remove all assets from centralized exchanges and as we know that's already a standing golden principle right for self custody however the reasons to have some assets on exchanges again yes not get into that here but if you do have assets on centralized exchanges for whatever reasons remove those assets in the part in the process of consolidating okay say well what's if you can what's the what's the number one reason for doing that the number one reason there is because what's going to happen because of the reporting that we just talked about in the Universal method and where you explained that when you sell the uh sell tokens from one wallet it might be that the C spases that's ends up being applauded is from a different wallet okay so in that scenario that you've explained and we've discussed what that means is the centralized exchanges do not have have no idea what your cost basis is because that resided previously universally in your crypto tax software The Exchange has no idea so whatever records they have are wrong yeah so what happens when they report cour when the when it comes time to issue the first 1099 da what's going to happen that's whatever shows up for cost basis is going to be wrong and then you end up in a Perpetual mismatch conundrum where it gets mismatched then that's reported to the IRS you know it's incorrect now how do you resolve those two how do you reconcile the two that's a whole another issue there being able to Recon the way you eliminate that he said he said yes youve got she said you gotta go through that then that's gonna create a whole another issue because now it's you hey hey coinbase you reported that incorrectly hey Kraken you reported that incorrectly so what you do is this is what I call call spaces cleansing so removing from The Exchange is specifically is call spaces cleansing remove those assets from The Exchange in the process of consolidation you could even call it a different consolidation strategy but has a specific reason as I just explained then after you've done all that if you want to later move it back to the exchange for whatever reason then we know if you're going to sell it you do that anyway but uh you know selling it for Fiat let's say but if you move it back to the exchange what happens is the exchange in that situation has no idea what your cost basis is they assign a zero to it okay they do now yes so even the even the even in the case of uh yeah so anything that did not reside on the did not any sales or other activity did not originate on that exchange they would they would not know what it is they'd have to assign a zero so if you take it off cleanse it put it back turns into a zero and so you still have their lesser of two evils which is it's better for the exchange to at some point in the future report a zero basis than to report some other number that's incorrect you follow me uh yes but do you you you still have to contest that zero so it's not to pay gains on the entire value of the asset um yeah it's it's not yeah I guess it's not so yeah wouldn't be so much of a contesting there because zero implies that there's number and you're going to say what the number is right it's not zero it's null it's no idea yes right I see yes so so the IRS knows that if they see a zero cost basis that could also be interpreted as we don't know it doesn't mean you bought this for free because obviously you there is no way to buy something for free so if there's a zero cost basis that doesn't mean the cost basis was Zero it means we don't know and the IRS knows this and a contesting it's providing the the missing information that's right and that's a far far better scenario than some other number that's not correct right because that other number is a number and you haven't provided a number so far and so a number is better than no number and the IRS will take it and now you have to persuade them it was wrong rather than they don't even have one got it that's right okay and what's step three so step three is is for those people that are uh on the spectrum of thing all the different things you can be involved in in crypto so if you're involved in liquid staking and all these other kinds of things you know dii being uh you know L liquidity provider all these other more complicated things so if you happen to be involved in that I say is the best scenario is to unstake uh split your LP positions apart so get it down to single assets and again you could say that's another cons solidation step but you know you could have I mean you know with in eth today there's all kinds of these liquid staking platforms so you could have e that's now you know easy eth um you know simplify X and so on and so on and so on so you want to unstake those and then get turn them into pure assets simplify into pure assets simplifying the pure assets okay consolidate remove from centralized exchanges and simplify into pure assets forget yield and staking and income generating and whatever just turn it into a simple um base asset go back to the basics all right that's right and one of the number one reasons is because you have the software conundrum and the software was already lacking in a lot of features and capabilities as it is under Universal now you're asking for a 10 times the complexity for a software that wasn't robust in the first place that's one of the number one reasons here okay great and all right so we do these three steps um then what well after you do those steps then you want to make sure your software is refreshed in the case where sometimes whether it's man sometimes these things may be automatic but sometimes there's literally refresh so you want to make sure that the the crypto tax software is now reflecting all the activity you've done through this consolidation exercise so once you get to that point most software will have the ability for you to export an ending balance report whether they call it ending balance report or an ending inventory report or whatever they may call it that's what you want to report now if you've already done that if you've already gone through all these exercises as of today let's say today you you you magically were able to perform all these things today and then you now you're at the point where you're pulling this report down what you don't want to do is then have any transactional activity between now and the end of the year because then you have to do it all over again so there's a bit of a timing issue where you gotta kind of put a pause on things right to do this exercise okay so I'm I'm a I'm a fairly uncomplicated uh investor both for our theoretical scenario here and also in actuality so I I I only have uh a couple wallets they're all self custody um so effectively I'm already at the end of of this I've already done the three steps because that's that's just how I operate so I've Consolidated I never had anything on centralized exchanges uh unless I was actively trading that amount and then simplified great so now I go into my software and I export an ending balance and invent that's right and and and and okay so very important question for you here because I have experienced this myself um what if that ending balance and inventory is incorrect well that's a whole another issue yes that's a whole other issue well yes and because the thing is it's most likely not going to be correct whether it's a small degree or a larger degree again that's back to what I call the software conundrum in the first place I mean look I've seen some of these some software platform will also give you a dashboard that's like here's your current here's the current value today and there's your call bases there's your unrealized gain so it's kind of a view of like where you stand right right I've seen dashboards where it's like oh well look at that it's actually more correct than it is it's sorry that's actually more incorrect than it is correct right because it just doesn't track well and again that's you know a lot of times that's where they got more complicated scenarios but anyway yeah that could be again you're just going to want to document this right all right so I can see two scenarios in which uh it will be incorrect for a number of uh people so scenario number one um which I think is very very common is people have lost so the software thinks based on purchases and things like that happened in the past that you have uh let's say half a Bitcoin that is uh that was uh on FTX well no I don't that blew up in everybody's face so I I suffered a rug pull or I had five Bitcoin on empty gaw um my tax software thinks I still own that right um maybe they haven't previously matched it to one of my transactions so they think that's part of my cost basis but that was lost when MTG went belly up and I'm never going to see that again so the software actually thinks I have things that I don't what do I do with that that's that's correct and there could be a whole host of other reasons but you've nailed I think that's one of the scenarios the other scenario that's also going to be very common is people have lost keys or or wallets that they previously had um where they moved stuff that they bought on an exchange for example and then lost the keys um and and maybe they've forgotten about that and they've moved on and bought some more crypto and moved it into other wallets that they haven't lost the keys so the software still thinks that they have some buckets that no longer exist because they got vaporized in that boating accident not non ironically like people have lost uh a whole bunch of crypto that way that's correct and your scenario the more simplified scenario as you said you know you can give a high five to wow uh selfs simplified self- custody is paying dividends now because it's like you're nine steps down the road to start with right yes exactly so yeah in this case what you would do is first of all if you achieve one asset in one place okay then you know that all the call basis that you have goes as assigned to that then it becomes its dirt simple you know I have 5 BTC all the cost bases for that is in the same W it's that's it then it just becomes all the dates associated with that call basis are also in that one spot so that takes care of itself so if you think about it where you have a column right it's swall it and then it's number of coins and call spaces and then you have another colony where you could say actual one could be say software next column could be actual and you could then go verify to what you actually have and then you could put that in there and then you'd have then you'd have a you could even calculate a difference column now if it's a minor difference there's almost always differences anyway but if there's a minor difference that's not going to be that's not going to be an issue if there's a larger difference you want to document it but the key the key takeaways here is to document what the issues are so not only you're doing a objective kind of analysis with numbers and thing numbers dates asset symbols and so on to amounts but you're also doing a memo to describe any of these issues along the way putting a St stake in the ground here and and that's part of this exercise is is drawing a line and saying at this moment now it's all being simplified everything stopped moving at the end of 2024 this is the report um good bad correct incorrect uh whatever this is it and I'm going to put that line there that's right and use it okay great and so the thing is if you have a big difference like you said all those scenarios you suggested now again the challenge comes back to oh well I'd like to make an adjustment here to make these two things match what's what's actual what's in the software what's the issue there well the issue is the tooling is not there the feature set is not there to make adjustments in some cases you can but then the bu product of that is it creates a bigger problem so it's like which problem do I go with the difference that I have or try to plug it and make an entry and fix it which could create a larger problem and a different problem okay so again you know we again you could we could go we could go into the Weeds on that thing but again think the best thing to hear is do you need to fix those things before the end of the year um th those are simply documenting the state right you have once you've simplified Consolidated Etc and produce the report you don't actually need to I I hope you don't to fix the report before the end of the year if there are discrepancies or do you well well the idea would be if you could fix it in some way fix it but the issue is fixing is you're basically I I see it is metaphorically handcuffed in the fixing right Limited in your ability to the fixing the the key the best thing to do is document it document do document okay great you got the subjective memo piece and then you have the numbers piece and the key one of the other big top three key takeaways of the day is and this is always true and always applies to everything you do okay especially in let's say tax compliance which is act in good faith make a reasonable effort right here with exercise it they even say it in the ref proc IRS says make a reasonable effort to do this okay and do the best because at some point you can't do better than the best you can do if you say hey I did all this and I got these differences I've documented everything and then you say I can't fix it I've tried fixing and it doesn't work it's like okay well I'm just going to stick with what the software says I've documented everything you can't do better than the best you can do and that's it right so right there you go I I think that's a really important thing and you know that's obviously different in the United States than it is in other countries which is that at least in my experience they don't tend to go after people for making honest small mistakes what they care about is someone who is do deliberately making mistakes or not even trying to do the good faith thing if you do the good faith and you do the reporting mistakes can be figured out um they're not really looking for that um and fortunately fortunately and I think this really helps us is um there there are actually a whole bunch of um can I say idiots who are going out there and doing such BL latently criminal tax evasion things uh as to fully occupy the time of the IRS um and uh and and they're fully occupied going after them and not trying to go after people who are making an honest effort to to to do this uh all right so now I noticed in your newsletter um in in terms of uh producing uh uh the documentation you've produced this final export uh and you suggested uh that it would be important to um save that in a way that you can demonstrate that that was saved on or before a certain date um I had a bit of a quibble as to the methodology you used for that um I I can't remember what you recommended but I I I have some other recommendations maybe we could uh discuss that I would love to hear your recommendations okay I was I was giving the most simple one that I thought most people would probably do but I would love yeah I would love to hear other great recommendations on it what it comes down to is well let me just one final thing to close the loop on that so you're going to do this documentation you're G to do the best you can again the consolidation is going to make this simple so that that way um you know as we explain you got one asset all the call spaces goes with it and everything like that so you've now got this spreadsheet because likely it's going to be in your spreadsheet you save it that's your documentation okay so even in the case where like you said you might have somebody who's a 10 of 10 they say hey I've got all I have is Bitcoin and one wallet and I actually have an X I actually have it like it's already there am I good the question no what I would do is file save as to because that's declaring that this is the document for this exercise right and you retitled it maybe you put the the title even at the inside the document you've titled the document here 2024 final ending balance Safe Haven report correct dox LS yes okay I said email it to yourself so go ahead I'm gonna the ball's in your court what can you do better so what is the goal of emailing it to yourself let's clarify that uh your recommendation is is certainly a a a reasonable recommendation to achieve the goal the goal is to create a timestamp and that timestamp shows that that document existed on our before and it's also stored securely um I the only thing I would be hesitant doing is the following um most people use a custodial email provider like Gmail I I don't know anyone who runs their own mail server anymore uh even the hardcore Geeks um the problem with that is that it creates uh a very very significant privacy risk because then you have a a a spreadsheet with all of your assets sitting on a mail server um probably Google's mail server that is being actively harvested to train AI um and is is being harvested for all kinds of data analytic purposes by by Google they um take the stuff that's inside the attachments and they build search indices on it for your Google profile um so I would be worried that if someone compromises your email accounts now they have access to your entire asset list um I would be 1,000% I guess if you're gonna email I'd say proton mail if you had the email yourself yes that that would be if you happen to use proton mail I know a lot of people uh who are more security-- minded I was going to make a different recommendation uh which I think is equally effective um we we need this to last 10 years um so sometimes old school it works just as well so for the time stamp I would like to recommend uh a solution called open Tim stamps.org um open timestamps is a open uh protocol that uses the Bitcoin blockchain to timestamp uh hashes Fingerprints of any sized information uh and it's completely free and it's a completely open protocol that even if open time stamps went away there are uh command line clients the software that implements the protocol uh it's not dependent on any single provider and what open timestamps does is um you load it in your browser and then without sending the information from your browser to anywhere else you upload a file but it doesn't actually upload it it simply processes it in your own browser window locally and what it does is it calculates a sha 256 fingerprint of that file uh and then it cues just the fingerprint just the Sha 256 fingerprint um for inclusion in a Merkel Tree on the Bitcoin blockchain that contains other timestamps that other people are trying to Tim stamp and every 10 minutes uh it puts one transaction which has tens of thousands of file um finger prints that people are trying to timestamp and then it gives you a proof and the proof is another file uh it's an open Tim stamp file um and it has the same file name so let's say you called your thing final ending balance 2024 IRS safe haven. XLS you put that in your you go to opentime stamps.org you uh click upload um it it it then gives you um final 2024 or IRS haven. open timestamp you can then take the spreadsheet the XLS file that you timestamped and the timestamp file that it provided and you can use those to verify and it will show you a proof that that file was included on the Bitcoin blockchain on December 27th at 1059 p.m. and here's the proof uh and that proof is recorded Forever on the Bitcoin blockchain so you've got got a time stamp that time stamp is based on the Fingerprints of the file and the proof is a file itself that you that anyone can verify um was included really nice protocol um I think Peter Todd built the first prototype um and proposed it it's a great system and it allows you to time stamp now the most important thing is the spreadsheet that has all of your balances never leaves your computer it never goes anywhere all that goes to the Bitcoin blockchain is a fingerprint and as we know the shot 256 fingerprint is nonreversible you can't get from the fingerprint to the contents of your file that stays with you you then end up with two files you need to store the spreadsheet and the time stamp verification file that you can in the future use to prove um and those two files you can put on two USB sticks and stick them in a safe deposit box or in your safe um and put a copy on your own computer um and and keep them so that that would be my recommendation that is the uh I think that's best practices and the number one method for forting great thank you I'm I'm glad you like it it's it's super easy and uh and people can execute it doesn't require any technical skills you go to a website you upload a file it gives you another file it's really simple and then you store both of those open amps open timestamps o g is the website you want to look up all right um with that I think we've this has been a long introduction but we've actually covered a lot of things so what I would like to do is I have a bunch of questions that have been submitted by the subscribers to my patreon um who uh asked questions about this whole conversation I think we've already answered many of them but maybe we can quickly go through them um and just confirm some of the answers we've already uh provided or provide new ones how do you feel about that I it'll help reinforce what we've talked about great so I'll go and ask you the questions now so the first question was what are the consequences of not getting Safe Harbor would that restrict reporting to fiveo only um so from what I understood what are the consequences of not getting Safe Harbor you've already said um you're going to have to do this anyway and you're going to do it in a much more complicated and disadvantageous way you don't do it now right that's correct plus you're losing the possible protection of have being challenged for all of your prior activity all right so let's focus a bit on the second part of the question because I'm not sure we answered that would that restrict reporting to fifo only does any of this change which cost basis method you can use no it does not that does not affect Fone as a matter of fact this is another thing that I've identified as I think a a missing uh benefit or something that's just not being talked about or covered um inside this conversation which is that this actually gives you the opportunity to potentially make a call spaces methodology chain change inside of going through this exercise like I go through it again stay con sand I've done all this work you know what I used to use that method and now I want to use a different method this is a great time to say hey I want to make that change because you teed it up to do it oh so you get a free reset a free reset oh that's really really cool okay nobody's talking about that that's a huge huge thing right um so maybe you were doing 5ho before and maybe you want to do highest PR highest price first out uh starting January and the Safe Harbor you feel confidence gives you that context to make a change yes and you know I want to make sure to insert something now because I want to make sure we don't forget it even though it may be answered with the other questions but the thing is here this also super critical and again could probably even go into a whole you know go way off into the Weeds on this and have a whole another a whole another talk on it but the thing here is with spe specific identification going forward the challenge is that you need to identify ahead of time declare this is what I'm selling so this particular lot it's Bitcoin it's this amount that I purchased way back when and that's what you're going to do so stuff we already talked about about what the methodology is but you need to actually declare that and again put a stake in the sand it will be like doing open Tim stamp. org every single time you want to do a transaction before you actually do it and then go do it because you basically blow uh qualifying for specific D spec ID if you do it after the fact but it's an after Thea exercise anyway the software is not designed to to there's nothing that's designed to do and document and capture this stuff ahead of time so that's a whole separate thing is how do you manage te ID going forward but you may say wow that's crazy I I don't see how I can comply with that I don't think there's anything that's going to come out that so so you might say well that's my compelling reason for going to f okay very good so if you were doing spec ID um it might get very complicated going forward and so specific identification is where each time you make a sale you match it manually to the most advantageous cost basis that you want uh and people were doing that because they wanted to pick and choose with every sale but they were doing it after the fact at the end of the year as part of their reporting going forward that may not be possible at all which means that specific identification as a methodology may become super cumbersome because you correct and a and possibly get you into hot water and you're saying the Safe Harbor gives you an opportunity to change your methodology because this is the advice I got for many years from many accountants which was it it doesn't so much matter what cost basis methodology use fifo uh lifo hpo or specific ID as as long as whatever you choose you then have to stick with it and not change it and that's what I've done and you're saying and now we get the once in a-lifetime Opportunity where you could do a reset on that if you want to a different methodology so take that OPP correct and specific specific ID may become so much more complex that this might be a very good time to do that that is correct and another thing you could potentially use to your advantage is where Hyo for example you might say that that's like a pseudo spec ID okay like you could say it's not specific ID is you know again whatever I want wherever it is at whatever point in time Hyo is a methodology highest in first out but you could say I'm GNA going to use that and that's some somewhat what specific identification was it's it's quasi is a better word it's like a qu right so you could say you know what because it's very challenging to do this going forward you could just say all right before each trade I just say I'm gonna do highest in first out before each trade you just declare it's almost like a standing order in a way right I see okay that could be a way for you to it's a little bit of a hack if you will as a way to achieve it in a simplified way I see um okay uh second question is is wallet here defined as all addresses controlled by a wallet the piece of software or Hardware that we're using or is it one wallet one address that is an excellent question I'm glad we have addressed that because in this case so let's take Bitcoin for example or if you had a wallet that where you were able to do a new new address one address per one transaction right that in that particular case that's just the wallet is one that's the container all the activity in that wallet is one container that's it but on the other hand you want to compare that to metamask for example and you have uh you got metamask set up and then you can create multiple eth accounts in there okay like account it's kind of like account equals address on ethereum so in that case it would be each of those accounts is actually its own wallet so to speak its own accounting that account right own separate thing okay okay because you could have one metamask that has 10 accounts or you could have 10 metamasks that each have one account so it's it's one account is where you need to account for in that scenario okay so I I think what I'm understanding is that there is no clear rule that really says what a wallet or an account is but it's more about can you PL posibly categorize things that are controlled by a single set of uh for example let's say I have a a a Bitcoin wallet that is all generated from a single seed I can make a very good argument that that is one wallet because all of the keys and addresses and everything else is generated from that one seed if I was using that Hardware wallet to do ethereum again all of the keys and addresses are generated from a single seed that I'm managing from a single device that's a fairly convincing argument that that is one wallet right um but it gets murky if you have different pieces of software and different um key material that is that is controlled in different ways it gets a bit murky as to what exactly a wallet is yes that's that's correct and the other thing to Overlay with that is like you you've got this these situations like you're describing but then it's okay well how does it show up in the software because if the software is containerizing it as a separate thing then that's you could like work backwards to say that that's what I'm going to use as my definition right and I I'm thinking that uh you know from my perspective for example I'll use a A Single Seed and that seed will generate Legacy Bitcoin addresses uh segwit Bitcoin addresses nested segwit Bitcoin addresses tap rot addresses um you know I may then send that to um an exchange they they don't really pay attention to what type of address it came from it's all from the same wallet but it might be contained in different types of address I would make the argument that's one that's one wallet that's a great example where in self- custody it's in five little buckets but when you s if you sent something from all five of those and to the exchange it goes from five to the one bucket yeah right so but again it's it's if it's if if the if that would be where if you've got those different types of Bitcoin addresses then and you're putting it in the software you probably would need to put the five different ones in there for it to pick it all up and bring those yeah I so I would say this probably falls under the make a good faith best effort in terms of consolidation and then be consistent and uh and hopefully then you can make the argument if it ever comes up that that's what you were doing making a good faith consistent effort that that's right that's a yes that's a key takeaway by the way there just to highlight that word when I talk about reasonable effort and good faith consistency is another key thing always be consistent it's accounting principle actually right excellent uh what crypto accounting software best accommodates this uh one-time allocation requirement or opportunity this Safe Harbor is there any software that has actually um being able to adapt and prepare itself to do this for you or help you with this well my my immediate answer is none n but that's right but just going along with everybody over time is always always wants to know hey what's the best software in general forget about at this point in time go back in the P hey what's the best software the answer is none it's like what's the lesser of the evils and what are you trying to achieve what's the best one that fits your use case and so on and so on now I I think I have a good answer to this I think I have a good answer to this which conforms with your accounting principles which is it's the software that you've been using for the past several years good or bad now is not the time I don't think unless you have a compelling reason to to to throw that away and start fresh right or is this a good opportunity yeah no you nailed it because now you're introducing having to go through the allocation exercise that we've talked about and you're GNA try to do a migration now you've like right doubled the complexity or more right yeah you don't want to migrate and then try to do this at the same time so it's yes so what's happened here is you've gotten relegated to using what you already have now with that said there are some like a coin tracker for example I know that one specifically they saw this coming down the pipe and they they started at the beginning of 2023 and said we're going to lock these wallets down we're going to like take whatever is in there we're going to like lock it and assign it to a a wallet and so on okay yeah so um and again that's another question people would have was like oh well this in in the rare case where the software might have done it is is that my my work product and the answer I still say is no you still want to you still need to spit something out into something type a document that says this is the work product the work paper that I did right because you know you know also you can't leave this on somebody else's website you have to have your own copy because it is not their burden to produce this if they go belly up if they disappear if a fire consumes their Data Center and they don't have any backups whatever and suddenly that website doesn't exist you have nothing so um always produce those reports okay great um um so if you have never filed taxes on crypto before you have a bigger problem in that case you have a blank slate to pick whichever crypto tax preparation software you want but um if you have already picked one you stick with that one um so what do we need to be careful to look out for if we've been using tax per creation software for some time and especially if we are making changes from hio to fifo that is another that's another excellent question so the thing here is I'd say probably one of the number one things that sticks out is that let's just use a uh go back to the universal the way this has been done up until this point like we've been talking about Universal um accounting method for tracking so what happens is every year that you go in so you start if you started in 2015 you put all you get all your transactions in there you do a calculation okay now you're in 2016 uh the new transactions are updated when that calcul when you do 2016's calculation and 2017's calculation and 2018 calculation every time you do it it's recalculating everything the one giant pot of transactions that we talked about it recalculates everything back to the beginning of time to produce the result for 2018 so every year is actually inextricably linked to every other year they're not done in isolation and another thing you can't do you can't say hey Hyo worked great in 17 h work better in 18 I'll just pick whatever one produ gives me the best result you can't do that consistency got to pick and stay with the same one so the question is if a software uh claims that they're doing a some type of uh a feature change what you need to understand and again this should be published but again I I don't know that it would be published but I'd be skeptical if it does get published but you need to understand is the previous work being locked down okay such that when I do my calculation for 2025 is it only looking at my fresh starting point again the goal of the exercise we've been talking about or is it going back in time and recalculating everything all over again so it's like is there a lockdown like that so there's nuances with with that around the software yeah um and I I remember distinctly that one of the features in the software that I happen to use is that uh once you're done with a Year's calculation you can press button that says lock and and that's exactly what it does it doesn't allow that here to be recalculated uh and I'm assuming in the background it doesn't allow those cost basis uh allocations to be changed for whatever was calculated there um and that that's a cool feature all right and and so in terms of pitfalls if you are changing from higho to fifo this Safe Harbor ending balance report that you produce is your way of on your side locking things down so you have a clear starting point regardless of what the software is doing that's right now again you want you want these two things to obious you know you want them to be the same or you want the differences to be as small as possible Right but yes okay um uh next question is I have purchased Bitcoin from three major exchanges and bisque for those who don't know bisc is a decentralized exchange for privacy most of these funds were coin joined using Wasabi or Samurai and then placed back into Cold Storage I keep a record of my purchase history in Excel and have never sold or converted back to Fiat this is quite a quite a hodler we have here um based on the guidance in this article is this sufficient for tracking or must I make a report before the deadline yeah this is that's that's a great uh use case scenario an example to pull from I think we've already touched on it but it's important to highlight this again where this is a scenario where what I'm getting is we have one asset Bitcoin in one spot a hardware wallet so they've already done the consolidate remove from exchanges and simplify steps they're past that they already have a report um so they're they're they're 90% of the way there but they still have to do correct it's almost 10 of 10 it's but it's the one so maybe we'll say nine yes and the reason it's nine is because again it's like oh yeah I actually check all the boxes I've kind of done all the work and I happened to uh it happened to work out for me that I I fit I fit all these things that I need to do so but again what you need to do that was where I would open it up file save as there's your report but put the title on inside the document yeah at the top and then and then you know file save as and rename it create a specific copy at this time and then timestamp it using open Tim stamps.org so you still need to do the drawing of the Line in the Sand you're in the correct place to draw the line in the sand you have everything ready you still have to draw the line and the way you draw the line is make a make a separate copy that is not going to ever be modified so lock it down of that report um and Tim stamp it so that you know so that you can prove that that report was made at this time and in that case study example that's the absolute minimum steps yes that's what example you're very lucky if you're in that simple solution all right um and then I I think there's another really very specific scenario I've only ever bought on sold on coinbase I have a good record of those I've reported gains on sales and per purchases and use fifo specific Lots would be helpful now for my situation what do I do Under The Safe Harbor to facilitate that and factoring I have mostly self- custody on multiple uh wallets right so this ties in what we just said is where one of these things that's not being discussed here is it gives you also a unique opportunity to say I'm going to change my cost basis method okay yes but but in this particular case they're suggesting going from fold to specific Lots or specific identification as you called it and you said that's going to be tricky in the future because you're going to have to preallocate before you sell every single time that's right so this is the he's actually asking the opposite of what we pointed out yes essenti as an example Swit now with it being said that specific identification you would have challenges around this but the thing is is the benefit of that methodology can be so great yes that you said I cannot give that up in other words the power to pick and choose my gains and losses see with f that's what you're giving up here this is important Point yes you're just saying I'm at the whim of the methodology but with spec ID you say I have the power and control to determine the outcome of my gains and losses so you got to decide whether you want to give that up or not and again yes if you go down that method uh decide to make that switch fifo spec ID then again maybe it's let toggling the software to Hyo and then it's more or less you do a standing order where you just say every time again figure out which way to document before the trade because it has to happen before the trade and then just say it's I'm I'm selling highest in first out in that wallet I see yeah and that way everything matches up you're achieving the software matches what the outcome is and it's it's it's close to specific identification you can okay um so it's going to be uh significant accounting cost and it's going to be a significant burden but there are circumstances in which that is more than worth doing uh depending on how your cost basis is so um how do you do it documents consistent and good faith all right um I bought I bought Bitcoin on behalf of family members via their verified coinbase accounts using their funds and moved it to Shared Cold Storage all stored on the same Hardware wallet it hasn't been moved in years if I use First in first out and their individual coinbase histories to report any sales on their behalf in the future could the shared cold wallet situation cause tax issues so the answer is yes and not only does it cause tax issues this is this is a co-mingling violation I say never ever ever ever ever ever ever ever commingle you're basically acting as a broker on behalf of your family and this particular case you could have that could be an issue I mean there's mean you could you could go down and you could have a whole case study on this scenario right here and talk about all these different things to come up with it but first of all co-mingling in Fiat is already a nightmare yeah comingling in crypto is multiply it times 10 or more pick your multiple Factor on that the coming so what I always like to say is it's like the metaphor is you're in the kitchen about to bake a cake and you got all the ingredients you got the chocolate morsels and the the powder and all the things it takes to bake a cake and then you mix it all up after you mix it get mix it up in the mixing bowl guess what you can't unmix it it's mixed together and that can happen in crypto I'm not saying there's there are scenarios where it's like oh based on the specific facts and circumstances I can unmix it but that's actually more unusual It's usually the cake batter where you mix it together and you can't unmix it so right and and yeah and one of your relatives is allergic to peanuts so um okay so it could be difficult to it could be very difficult to peel that apart it's just there's a no no there for many many reasons inside and outside of the the context of this conversation anyway so don't do that and it could create several issues but at the same time I think uh let me suggest just a hypothetical here and you tell me if this might work the Safe Harbor has now provided a a really nice opportunity to potentially um clarify the documents and draw a line under this mess in a way that will prevent worse problems happening in the future so previously you suggested Step One is consolidate maybe in this and only this narrow scenario you're like okay there's five family members you actually still have the Excel spreadsheets you know what the coinbase histories of these accounts are so you know what each person's balance is maybe this person's first step is UNC consolidate create four or five distinct wallets move each family member's balance into that distinct account in a wallet you can keep them on the same Hardware wallet but you use this opportunity to spread them apart and put the balance in each one separ separate them out do all of the reporting with a cost basis for each one with five different ones draw five lines in the sand and the Safe Harbor I don't know this is probably a perfect opportunity to undo that mess that is a perfect analysis that's your crypto Bullseye right there exactly that narrow case as you described it will be one where it's your opportunity clean the mess up solve the exercise all at the same time so if you got if there's five family members or whatever it is and that's all in the one Hardware wallet then it's time to set up the four other Hardware wallets and have get those sent out create the documentation and what I would also do is I would get it's a good opportunity to get the family members to I would create like a one pager that says you know this is what this was and this is now being sent to your wallet and basically get them to sign off that they they also agreeing to this starting point that this is the bit the Bitcoin that's coming into this new wallet this is cost basis on yourf yes yeah I get everybody to agree to it so it's black and white and super Crystal paper it paper it yeah okay great um and that that's actually the a great question to end on um so uh I think we can summarize this uh quite nicely first of all thank you so much for all of this uh incredibly detailed information I think I've learned a lot more about the specific circumstances uh this is going to be a mess it's going to be a burden but if you do the smart thing and you do the work in the next two weeks and it it could be quite a bit of work under some circumstances um you're only going to be saving yourself much more pain and burden later and in many scenarios you have a golden opportunity under the safe harbor to fix fix mistakes of the past to change your cost basis method maybe um to clarify and document what you've done in the past um and to wrap it all up in a nice bow so you could turn this burden into an opportunity um and The Guiding principles are you're acting in good faith you're documenting everything that you're doing and you're doing things in ways that are consistent would that be a good summary you nailed it up that was a perfect summary and you're right this is an opportunity as well or is a benefit like you said you could have again if you're closer on the dgen side of the spectrum and you got a whole bunch of wallets and accounts on all kinds of different chains and all kinds of different assets and it's just like you know let's just say little amounts maybe dust or whatever it's just like you know what I mean it could be like you know $30 worth here and this and that it's like a time okay just sell it for stable coins and consolidate all your stable coins and just have it be some dry powder for an opportunity comes along so it's to time to take advantage of just cleaning up stuff that's just been kind of hanging around lingering right y uh it's it's it's not going back up my friend it's it's trading for for one penny on the dollar of what you bought it for take your loss and and and write it off all right um so I I know that you're not uh doing tax accounting for for crypto I'm sure you're mentoring and and Advising and providing us with this incredible information and helping other accountants do it I if I was for whatever reason needing um a tax accountant uh who understands crypto for the first time today um and wanted to find someone for 2025 do you have any uh place that you would go looking any recommendations Oh you mean you're talking about looking for like a resource for where there's professionals yes yes where can you find professionals who understand I know you don't do that kind of work um but where can you find professionals who can help you file your 89 84s for next year um and um deal with the IRS and any other problems you might have yeah that's that's a great question so what I did is Al also at crypto Bulls eyesone I've actually created a there's a there's a there's there's a page on there that's actually called Professional Resources okay great durated a list of professionals which actually need to update and add make some additions to but so you have a directory there fantastic yeah Crea a direct directory and it also this while we're on it it also includes legal as well because sometimes it could be rather you might be a business that once now legal is more uh narrowly focused so not a lot of times attorneys specialize in a certain area Okay so but it could be tax attorney or it could be Securities Law or whatever so Al it's not just like CPA's tax professionals specializing in digital assets but there's also a legal aspect and there's also an other category as well um and you know the other thing too is in some scenarios where you're dealing with some issues in crypto taxation where maybe you weren't in compliance or for whatever reason you got a major issue then you're talking you need a tax attorney and you make you get when you get to a serious issue what I call that's where you need to call in the Special Forces yeah and may need to have a tax attorney like we example we have somebody that specializes in tax controversy mean meaning a serious tax issue that's what that means that that's where you're negotiating a cleanup operation with the IRS yeah so you want so to find the intersection of a tax controversy attorney and someone who specializes in digital assets and so on you're getting to a short list so right you know type of resources there too so okay Crypt buy. zone is the website uh Kirk David Phillips CPA and CBP uh my good friend and colleague who has helped us today decipher the IRS Safe Harbor rules for uh the upcoming change in how you calculate cost basis for 2025 and turn this burden into an opportunity thank you so much for all your time today that's all we had and uh for follow followup questions you can contact uh Kirk directly through cryptsy dozone and you can reach me on uh patreon patreon.com aantonop or aop.com on my website thank you all for watching I hope we've answered your questions today have a great one and uh happy holidays to everyone bye bye